IFC’s Role in China’s Financial Sector Transformation

November 2012

Contents '()*+,-./0.1.*23!44444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444!5! 6732!+8!'99:.;7.(?27;.!@?11
T able 1-1: List of Beneficiaries Interviewed Intervention

Beneficiary

IS, SME

Nanjing Dongdian Inspection & Measuring Equipment Co. Ltd

AS+IS MF CHUEE

China Foundation for Poverty Alleviation Microfinance Management Co. Ltd Fujian Sanxinlong Co. Ltd.

Panda Bond

Aier Eye Hospital

Dim Sum Bond

Shenwu Environment & Energy Technology Corp.

A nalysis and synthesis The review takes a holistic and systematic approach to the analysis and synthesis of information and data collected from various sources. As illustrated in Figure 1-1, it analyzes DQGV\QWKHVL]HVWKHGHYHORSPHQWUHVXOWVRI,)&¶VLQWHUYHQWLRQIURPVHFWRUal, institutional, and individual perspectives. x A t the sector level, WKHUHYLHZORRNVDWKRZ,)&¶VLQWHUYHQWLRQs have contributed to creating an enabling environment in terms of strengthening financial sector infrastructure; improving the policy, legal, and institutional framework for financial services; and creating a demonstration effect by building institutional capacity that benefits the financial institution and larger numbers of businesses. x A t the institutional level, the focus is on establishing evidence of the changes brought to the financial institutions (FIs) by IFC additionality, both in practices and financial performance. x A t the individual level, the focus is on understanding how various IFC interventions collectively have improved access to finance for businesses and individuals, especially SMEs, thereby contributing to the economic development of China. This review does not attempt to estimate the number of people who have benefited directly and indirectly from obtaining financing and resulting improvements to their income and living standards. It should be noted that IFC worked closely with the relevant regulatory institutions in all of these efforts, both in response to their requests for assistance and because IFC identified key issues that should be addressed in the reform process and brought those to the attention of regulators. This represented an important contribution to the enabling environment, as well as a model of regulator-financial institution collaboration that has accelerated the advancement of lending institutions. The CBRC and its predecessor bureau in the PBOC have been core SDUWQHUVLQ,)&¶VHIIRUW7KH0LQLVWU\RI(QYLURQPHQWDO3URWHFWLRQ(MEP) and its predecessor commission have been invaluable partners in promoting sustainable lending policies. IFC also would like to express appreciation to the Ministry of Finance for providing guidance, support, and encouragement in these efforts over the past twenty years.

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period of the mid-1990s, the Big Four banks of China were technically insolvent. Foreign financial LQVWLWXWLRQV¶ XQGHUVWDQGLQJ RI &KLQD¶V ILQDQ cial industry was mostly negative, so they did not want to be LQYROYHG,)&ZDVDSLRQHHU2QO\LQVWLWXWLRQVOLNH,)&ZRXOGWDNHWKHELJULVNWRWU\DQGH[SORUH´ ³$IWHUWKH%DQNRI1DQMLQJLQYHVWPHQWWKH&KLQHVHJRYHUQPHQWVKRZHGXVWKHGUDIWRIWKHUH gulation that was

going to allow foreigners to invest in Chinese banks. That was exactly the kind of thing that we were hoping for. They would see us as a go-to group for feedback on regulations of this kind and it would have a systemic LPSDFW´ said Finkelston. At the end of 2003, a new regulation by CBRC officially allowed foreign investment in Chinese financial institutions. Box 6: I F C Investment in Bank of Beijing Bank of Beijing (BOB), formerly called Beijing City Commercial Bank, was established in 1996 as a city-level joint-stock commercial bank through the consolidation of the 90 urban credit cooperatives in the Beijing Municipality. Bank of Beijing was the second largest, in terms of total assets, among 111 city commercial banks in 2005 when IFC made a $59 million equity investment in the bank for a 5-percent stake. ING Bank NV of the Netherlands took a 19.9 percent stake, just under the 20-percent-stake ceiling that a single foreign investor was permitted in a Chinese bank. The combined investment by IFC and ING reached the maximum 25-percent limit LPSRVHGDWWKHWLPHE\&KLQD¶VEDQNLQJUHJXODWRUIRUFRPELQHGIRUHLJQVKDUHKROGLQJVLQDGRPHVWLFEDQN ,)&¶VUHODWLRQVKLSZLWK%DQNRI%HLMLQJVWDUWHGLQDWWKHWLPHRIWKHEDQN¶VLQFHSWLRQZKHQWKHEDQNKDGD significant legacy NPL problem. From 1997 to 1998, IFC successfully implemented a technical assistance program of $700,000 to assist the bank in improving credit risk management and formulating overall business strategies. IFC has remained actively engaged with Bank of Beijing on multiple fronts. Bank of Beijing and IFC partnered on energy efficiency financing, with IFC providing training and risk-sharing under the CHUEE program. IFC also provided a credit line to the bank to support its trade finance program. Discussions were held on other new lines of business. IFC also arranged meetings with Bank of Beijing for senior World Bank officials, including President Robert Zoellick, to provide the World Bank with insight into private sector developments in the banking industry in China. ³,)&WRRNDORWRIULVNE\LQYHVWLQJLQXV«,WVSDUWLFLSDWLRQLQFUHDVHGRWKHULQYHVWRUV¶FRQILGHQFHLQWKHEDQN´ YANG Shujian, board secretary, BOB, said. ³,)&SOD\HGDYHU\JRRGUROHHYHQEHIRUHLQYHVWPHQW,WVPLVVLRQRI

promoting private sector development and market economy was very noble. We had a very good impression of ,)&HYHQEHIRUHWKHLQYHVWPHQW´

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Business Strategy and Risk M anagement

IFC engagement with these banks usually started well before investments took place. IFC provided training on business and strategic planning and risk management to six of these banks, and helped them understand that balance sheet growth is not so important as profitability, good underwriting practices, and sound credit management. ³:HZHUHEULQJLQJ very fundamental commercial banking knowledge to our Chinese partners. Although it may sound simple these days, those support efforts really made an impact with banks and results ZHUHYHU\SRVLWLYH´said Ipson. IFC also introduced stress testing as a risk-management tool to Chinese banks and the banking regulator. In 2004-05, IFC conducted stress tests on five of these banks, and presented the results to each bank, as well as to CBRC at the aggregate level. IFC banking specialists for the East Asia-Pacific Region gave a two-hour presentation to CBRC at the UHJXODWRU¶VUHTXHVWRQZK\WRFRQGXFWVWUHVVWHVWVDQGZKDWEHQHILWVthey produce. In a visit to Bank of Nanjing in July 2004, IFC introduced the rationale and models of stress testing to Bank of Nanjing. The following year, IFC and the bank collaborated on designing a customized stress-WHVW PRGHO ³$IWHU WKH QHDUO\ RQH-year cooperation with IFC on data collection, data analysis, designing key parameters, building up the model, and using the model to analyze our businesses, we finally completed the stress test on our lending business and recommended responses based on the results of the test. (Through this exercise,) we OHDUQHGWKHEDVLFVRIFRQGXFWLQJVWUHVVWHVWV´FRPPHQWHG%DQNRI1DQMLQJLQDOHWWHUWR,)& in 2009.28 ³:KDW ,)&GLG KDVKDGDSURIRXQG LPSDFW RQVWUHQJWKHQLQJULVNPDQDJHPHQW DW %DQNRI1DQMLQJ´ the bank said in the letter, referring to the overall influence of IFC on the EDQN¶VULVNPDQDJHPHQW ³7KLV VWUHVV WHVWLQJ JXLGHG D ORW RI RXU SRUWIROLR PDQDJHPHQW DQG $GYLVRU\ 6HUYLFHV activities in the following years. Had these banks not changed, I have no doubt that they would have run into severe problems. I also think this work really helped CBRC understand WKH LVVXHV DQG WKH ZD\V WR UHJXODWH DQG VXSHUYLVH WKH ILQDQFLDO VHFWRU´ said Bill Haworth, FKLHIVWUDWHJ\RIILFHUIRU,)&¶V)LQDQFLDO0DUNHWV'HSDUWPHQW ³6WUHVV WHVWLQJ QRZ LV D VWDQGDUG SURFHVV IRU UHJXODWLQJ WKH EDQNV (DFK EDQN KDV LWV RZQ VWUHVVWHVWVDVZHOO,WKLQN,)&¶VVWUHVVWHVWZDVWKHILUVWWLPHWKDWWKH\KDGVHHQWKLVWRRODQG I think it has helped the banks a great deal in monitoring thHKHDOWKRIWKHLUSRUWIROLRV´said Ipson. x

Corporate Governance

IFC appointed directors to seven of the eight banks where IFC had an equity stake and nominated an independent director to the eighth. When IFC director John Langlois was appointed to the board of Bank of Shanghai, he was the first foreign director on the board of a !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 28

Letter from Bank of Nanjing to IFC, dated Aug. 24, 2009. 5&#$%&!

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Chinese bank. ³6LPSO\KDYLQJDIRUHLJQHUVLWWLQJRQWKHERDUGLWVHOIZDVELJSURJUHVVIRUWKH Chinese banking industry, let alone some of the new concepts WKHIRUHLJQGLUHFWRUEULQJV ´ said Jerry Wu, IFC principal investment officer. All five banks the team visited spoke very highly of the experience, dedication, and contribution of IFC-appointed directors, and recognized this as one of the most important impacts IFC has had. Key IFC contributions at the board level included: x IFC directors serving as the bridge between Chinese management and other foreign strategic investors, bringing their Chinese language skills and understanding of the culture and system. Bank of Beijing had high praise for its IFC-nominated director, who it said played an important role in coordinating bank management and ING. x IFC directors bringing positive changes to the functioning of the boards by collaborating with local board directors and demonstrating how the boards could exercise decision-making and supervisory roles, and by asking management tough yet necessary questions that resulted in better quality of materials being prepared for the board. x IFC directors contributing to the sustainability of the banks by serving on their board Risk Committees, Related-Party Transactions Committees, and Audit Committees, and vetoing proposals that could be detrimental WR WKH EDQNV¶ KHDOWK DV ZHOO DV balancing tradeoffs between long-term and short-term benefits for the banks and their shareholders. %DQNPDQDJHPHQWDW;L¶DQ&LW\&RPPHUFLDO%DQNZDVJUDWHIXOIRU,)&¶VSDUWLFLSDWLRQLQLWV Related-Party Transaction Committee, relying on the committee to reject some transactions in which management faced enormous pressure to approve the loans. As another example, IFC directors insisted that no dividends be paid out before the EDQNV¶capital adequacy ratio, also a new concHSWWR&KLQD¶VEDQNLQJVHFWRUUHDFKHGSHUFHQWDWDWLPHZKHQVRPHVKDUHKROGHUV wanted to get returns as fast as possible. In addition, IFC also provided corporate governance training, together with consulting firm McKinsey, to the boards of five investee banks, and also to the regulator CBRC. IFC also conducted a full corporate governance assessment in 2010 for Deyang City Commercial Bank. 7KURXJK ,)&¶V DSSUDLVDO ZRUN DQG/or other programs, IFC helped all the investee banks to adopt International Accounting Standards, which increased transparency and disclosure. x

Strategic Focus on Serving SM Es

The regional commercial banks, in other words, the city commercial banks, were designed to focus more on SMEs. They emerged in the second half of the 1990s as a result of the restructuring and consolidation of urban credit cooperatives. Through partnerships with IFC, the focus was sharpened, and new tools were developed. IFC provided SME banking diagnostic advisory services to five of the investee banks and helped develop SME scoring tools for Bank of Nanjing and Hangzhou United Rural Commercial Bank. ³,)& assisted the banks in developing good underwriting standards, and gave them 5B#$%&! !

management tools to become strong SME lenders´ said Ipson. ³ Although all banks in China talk about making SME loans, most of them are still focused on the larger corporations. Lending to smaller and weaker companies is still considered very labor-intensive and very difficult to assess in terms of enterprise risk management when they don¶t have strong audited financials. I F C has done a good job of helping management understand how to approach this segment and in helping them with the underwriting tools´ In February 2012 when Ipson was in Nanjing for a meeting, two managers of the business department of BON came to him and thanked him for IFC¶s contribution in SME credit underwriting and assessment. ³7his was a real demonstration of genuine gratitude for what I F C has done´ said Ipson. Yang of Bank of Beijing commented: ³,ZLWQHVVHGWKHLPSDFWWKHVH60(OHQGLQJ SURGXFWV had on job creation and corporate social responsibility. I F C strengthened our focus on supporting SMEs and as a result, we have made significant achievements. For example, all of the Beijing companies in the first wave of IPOs in the Growth Enterprise Market section were cusWRPHUVRI%DQNRI%HLMLQJ´ SME loans now account for 45 percent of their outstanding portfolio, up from 33 percent in 2007. Bank of Nanjing has made lending to SMEs its competitive advantage and has experienced rapid expansion in SME loan portfolio and at the same time improvement in SME (and overall) portfolio quality. See box below for more information. ! ! ! ! ! ! ! ! ! ! ! ! ! !

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Box 7: SM E L ending ± Bank of Nanjing Following its equity investment in 2001, IFC conducted an SME diagnostic in 2005 that provided the bank ZLWKD³JDSDQDO\VLV´YHUVXVJOREDOEHVWSUDFWLFHVLQ60(EDnking. In 2006, IFC made another investment, a seven-year, $47.6 million local-currency loan from the proceeds of its Panda Bond offering to Bank of Nanjing, specifically for SME lending. The long-term funding provided the bank with a new instrument to manage its asset-liability mismatch and narrow the maturity gap. A three-year technical assistance program also was launched covering business planning, market segment analysis, credit scoring, portfolio management, and staff training. By mid-2010, Bank of Nanjing has set up an independent small-business line with dedicated small-business lending teams in eight larger branches. It established over 30 specialized small-business lending subbranches. During the business expansion, the number of small-business loan officers grew from 80 in 2006 to approximately 200 in 2010, and the support staff for small-business lending grew from 20 to 80 in the same period. (Source: NCCB SME Loan Project XPSR, 2010.) The small-business credit scoring system, assisted by IFC Advisory Services, went live in 2010 and 50 SHUFHQWRIWKHEDQN¶VVPDOO-business loans were automatically processed by the system. ³7KHV\VWHPKHOSHG

us get rid of the limitations of manual credit approval. With the increased use of the syste m and DFFXPXODWLRQ RI GDWD RXU DELOLW\ WR PDQDJH ULVN LQFUHDVHG DV ZHOO´ Zhang of Bank of Nanjing told the research team. As of the end of 2010, the outstanding loan balance to small businesses amounted to RMB17.7 billion (approximately $2.8 billion), which was a 515.9 percent increase from the end of 2006, representing a CAGR of 43.8 percent. The expansion was much faster than the total loan growth of 26.9 percent during the same period. Also, small-business loans as a percentage of total loans increased from 11 percent in 2006 to 21 percent in 2010. The number of active small-enterprise clients increased from 805 in 2006 to 2,049 in 2010. (According to BON's definition, its small-business lending is limited to a single credit exposure of RMB30 million, or approximately $4.8 million.) At the end of 2010, the NPL ratio of small-business lending of the bank was 0.69 percent, which was lower than Bank of Nanjing's overall NPL ratio of 0.97 percent. It was also a significant improvement from five years ago when the NPL ratio of small-business loans was about 4.6 percent. !

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Box 8: Nanjing Dongdian Inspection & M easuring E quipment Co. SM E C lient of Bank of Nanjing The research team visited Bank of Nanjing borrower Nanjing Dongdian Inspection & Measuring Equipment &R ORFDWHG LQ .LULQ ,QGXVWULDO 3DUN 1DQMLQJ 7KH FRPSDQ\¶V PDLQ EXVLQHVV FRQVLVWV RI PDQXIDFWXULQJ digital magnetic detection machines, large forging products, and other inspection and measuring equipment for the railway industry. The company was established in 1996. The company started borrowing from Bank of Nanjing in 2004 with a RMB500,000 loan ($79,365). Today, the company has an outstanding loan of RMB35 million ($5.5 million). It turned to Bank of Nanjing when it needed funding for expansion and was not able to obtain a large-enough loan from the local credit cooperative from which it had borrowed before. 7KHFRPSDQ\¶VIDFWRU\QRZFRYHUVVTuare meters, and is seven times larger than before. The number of employees over the past few years increased from 30 to 150 people. Sales rose from RMB10 million ($1.6 million) in 2006 to RMB90 million ($14 million) in 2011. The average salary paid to its employees is RMB3, 000 ($476) per month, with full pension and medical insurance, as required by the government. The company holds more than 20 patents and is a technologically advanced and well-known enterprise in Jiangsu Province. ³%DQNRI1DQMLQJKDV given us lots of support and our business has grown bigger and ELJJHU´ said Chairman ZEN Dewen. ! ! ! !

(2) Rural F inance Following investments in six city and joint-stock commercial banks, IFC started moving into the frontier sector of rural finance in China, with a $27.6 million equity investment in 2006 in the United Rural Cooperative Bank of Hangzhou for a 5-percent stake. The bank was later transformed into a rural commercial bank, and is now called United Bank of Hangzhou. This was the first foreign investPHQWLQ&KLQD¶VUXUDOILQDQFLDOVHFWRUDQGUHSUHVHQWHGDPDMRUVWHS LQWKHQH[WSKDVHRI,)&¶VILQDQFLDO sector strategy in China. Rural finance was considered a frontier sector within the Chinese banking industry because of the difficulties in attracting private investors to it. Historically, rural financial institutions had high non-performing loans, a relatively poor customer base, and the challenges in consolidating ownership structure. It was particularly difficult for such institutions to attract strategic investors that could bring in best practices. Domestic financial institutions were not allowed to invest in rural commercial or cooperative banks, and other domestic investors did not have enough banking expertise to be effective in this sector. $WWKHWLPHRI,)&¶VLQYHVWPHQW&KLQDKDGDUXUDOSRSXODWLRQRIPLOOLRQ7KHLUILQDQFLDO5R#$%&! !

services needs were met mainly through about 30,000 rural credit cooperatives (RCCs), 35,000 rural postal saving offices (which did not engage in lending), rural branches of Agriculture Bank of China (ABC), and about 300 NGO-type microfinance institutions, as ZHOODVDVPDOOQXPEHURIEUDQFKHVRIFRPPHUFLDOEDQNVLQDGGLWLRQDOWR$%&¶VEUDQFKHV  Among these, RCCs were the most important because of their broad reach and dominance in providing both lending and deposit services to the rural population. At that time, assets of RCCs accounted for 11 percent of the entire banking system¶V assets in China. RCCs dated back to the 1950s and were usually owned by hundreds or thousands of local farmers or residents, each with a negligible amount of investment. According to official statistics, RCCs as a whole posted losses each year for ten consecutive years, from 1994 to 2003, and carried high NPLs on their balance sheets. In August 2003, the government selected eight provinces to participate in a pilot program for reforming RCCs. One key aspect of the program was to restructure and merge RCCs in each county into a single legal entity, closely resembling the restructuring of urban credit cooperatives begun in the previous decade. In 2007, IFC made a second investment in this sector with $32 million for a 10-percent equity stake in Binhai Rural Commercial Bank (BRCB). BRCB was to become a new rural commercial bank through the consolidation of two rural cooperative banks and one rural credit cooperative union in the Binhai New District of Tianjin. It was the first time that IFC acted as a founding shareholder of a Chinese bank.29

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IFC was the first international investor to become a founding shareholder in the rural finance sector. Others might have become such investors in other types of Chinese financial institutions, but the research team was not able to find readily available data on this. A China Daily article on Sept. 7, 2005, reported that British bank Standard Chartered bought for $123 million a 19.99 percent interest in Bohai Bank, a national joint-stock bank being set up. ! &%#$%&! !

Box 9: I F C Investment in United Bank of H angzhou United Bank of Hangzhou is located in Hangzhou, the capital city of Zhejiang Province in southeast China, in the vicinity of Shanghai. It gradually shifted its main client base from farmers to SMEs, micro enterprises, and individuals with family businesses in light of the increasing urbanization of the Hangzhou area. IFC took a 5-percent stake in the United Rural Cooperative Bank of Hangzhou (URCB) in 2006 (which later was transformed into a rural commercial bank). Coöperatieve Centrale Raiffeisen%RHUHQOHHQEDQN %$ ³5DEREDQN´  RI WKH 1HWKHUODQGV ZDV ,)&¶V VWUDWHJLF SDUWQHU DQG WRRN D -percent VWDNH,)&VWDUWHGH[SORULQJRSSRUWXQLWLHVIRUHQJDJHPHQWLQ&KLQD¶VUXUDOILQDQFLDOVHFWRUDVHDUO\DV Joined by Rabobank, IFC visited several RCCs in provinces selected by the government for a pilot reform program. LONG Yun, director of the Office of the Board, URCB, told the research team: ³:KHQ ZH VLJQHG WKH

investment agreement with I F C and Rabobank in 2006, we had two objectives. On the surface, one was to bring in more funds to increase our capital base. Actually, at that time, many institutions were willing to invest in banks. So we were more interested in bringing in a system to help us improve our corporate governance and to transform our operating practices to increase our competitiveness in the market. I F C has a wealth of experience in helping medium and small-sized financial institutions in developing countries. ´ ³,QWKHSDVWDVDUXUDOFUHGLWFRRSHUDWLYHZHKDGDYHU\KLJKPDUNHWVKDUH . We had the most branches in

the Hangzhou area. In certain areas, we were the only one. F inancing was still a scarce resource ± whether they liked it or not, clients had no choice but to come to us. We were not client-focused, nor marketoriented. Someti mes we were self-centered, actually. But the entire banking sector was becoming more and PRUH FRPSHWLWLYH´ said Long. ³,)& KHOSHG XV LQ ULVN PDQDJHPHQW LQGLYLGXDOVPDOO-business scoring

skills, and our transformation. With the $1.2 million technical assistance I F C provided, we were able to hire a consulting company, which designed a transformation strategy for us. It outlined how we could better revise some of our procedures and shift our mentality to better adjust to the development and competition of tKH PDUNHW´ Director Long said, ³2XU FRRSHUDWLRQ ZLWK ,)&  LQ WKH SDVW IHZ \HDUV RYHUDOO KDV PHW RXU H[SHFWHGREMHFWLYHV´

(3) E nergy E fficiency F inancing &KLQD¶Vrapid economic growth has depended on a resource-heavy model that has resulted in severe environmental problems and costs. Chinese leaders are now incorporating emissions reduction targets in WKHFRXQWU\¶VFive-Year plans and are experimenting with market-based mechanisms to supplement their traditional command-and-control mechanisms for environmental protection. 2QH RI ,)&¶V NH\ VWUDWHJLF IRFXVHV LQ &KLQD LV SURPRWLQJ HQYLURQPHQWDO VXVWDLQDELOLW\ DQG addressing climate change. IFC pioneered the China Utility-Based Energy Efficiency Finance Program (CHUEE), which combines a risk-sharing facility and an advisory program to directly stimulate energy efficiency financing in a self-sustaining manner. CHUEE was launched in 2006 and supports marketing, engineering, project development, &$#$%&! !

and equipment financing services to energy users in the commercial, industrial, institutional, and multi-family residential sectors that implement energy efficiency projects in China. As of the end of 2011, CHUEE partner banks had provided almost $700 million in loans, supporting more than 160 energy efficiency and renewable energy projects that reduced GHG emissions by 17.8 million tons.30 Two IFC clients, Industrial Bank and Bank of Beijing, and a non-IFC investee, Shanghai Pudong Development Bank, participated in the program. Industrial Bank has made energy efficiency financing a brand-differentiation strategy. It carried that commitment further to become the first bank in China and in emerging Asian nations to adopt the Equator Principles, a landmark in sustainable banking. Big Four banks in China also sought to partner with IFC, but the program had to operate within its capacity constraints, so interaction with these large banks has been limited to teaching seminars. At the energy management company level, an evaluation of the CHUEE program conducted E\ WKH :RUOG %DQN *URXS¶V ,QGHSHQGHQW (YDOXDWLRQ *URXS (IEG) in 2010 found that the program facilitated access to financing for such companies, which are the key market players in their sector, through technical assistance for capacity-building and by brokering new relationships with banks. Companies that participated in the program had a 31-percent higher probability of obtaining bank loans than those that did not participate in CHUEE, and also had a higher growth rate.31 At the end-user level, 68 percent of borrowers surveyed by IEG indicated that without the program they still would have implemented their energy efficiency projects, but on a smaller scale or over a longer time frame. It is also with the smaller companies that the CHUEE program had the most impact. The evaluation estimated that about 9 percent of the companies that had benefited from the program would not have implemented their energy efficiency investments without the loans that CHUEE guaranteed. Those respondents were mostly small companies facing constraints in access to finance due to their inability to meet collateral requirements. The research team visited such a client of Industrial Bank, Fujian Sanxinlong Co. (See box on next page for more information.) The IEG evaluation found that overall impact of the CHUEE program consisted of GHG reduction and business benefits to partner banks, energy management companies, and endusers that would not have occurred without the program. It also was found to bring nonquantifiable benefits related to demonstration and spillover effects. The survey conducted as part of the evaluation showed that the program was well-known in China, and there was interest on the part of banks and end-users in learning from the program. The CHUEE model is now being replicated in a new CHUEE-SME project, which is designed specifically to serve SMEs. Two of IFC¶V client banks ± Tianjin Binhai Rural Commercial Bank and Industrial Bank ± have signed risk-sharing facility agreements. It is !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 30 31

CHUEE Program Brochure. World Bank, 2010.! &"#$%&!

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also being replicated in another new project beyond energy ± CHUEE Water. And significant breakthrough has been achieved in a new project, CHUEE Jiangsu. In this instance, the SURYLQFLDOJRYHUQPHQWZLOODOORFDWHEXGJHWDU\IXQGVWRVXSSRUW,)&¶VULVN-sharing facility to a local financial institution, which will provide loans for energy efficiency and renewable energy projects in Jiangsu, the heartland of SMEs in China. The Chinese Ministry of Finance and China Clean Development Mechanism (CDM) Fund are also supportive of this initiative and joined Jiangsu province in providing first-loss protection to IFC. This is clear evidence of how important ,)&¶V HIIRUWV DUH LQ VXVWDLQDELOLW\ ways that IFC can act as a catalyst to stimulate commercial adoption of leading energy financing, and how ,)&¶V FROODERUDWLYH efforts with MEP and CBRC can be put into practice. ³ I F C demonstrated how energy efficiency financing can be a commercially sound product, which at the same time also creates great benefits to the community´ said Ipson. ³ It not only encouraged Chinese banks to engage in energy efficiency financing but also gave them a new perspective on corporate social responsibility ± on how you can link good business with good corporate social responsibility. A core value of I F C around the world is that we put into action things that generate social benefits and we do it in a commercially sustainable way, so that these programs can continue and not just rely on subsidies from the government. Projects such as C H U E E Jiangsu (SME) have a great demonstration effect that SMEs are both profitable business segments and also able to generate good social impact´ ³&+8((ZDVLQGHHGDQHZFRQFHSWDQGULVN-shaULQJZDVDQHZFRQFHSWDVZHOO´ said Wu. ³Since 2005, the most welcoming agenda for introducing foreign investment (for China) was new product and new concept. So that was the selling point of this product and it was wellreceived´ It is important to recognize that the success of the program was inseparable from the Chinese JRYHUQPHQW¶VSROLFLHVDQGLQLWLDWLYHVLQSURPRWLQJHQHUJ\HIILFLHQF\ILQDQFLQJDQGWKHHDUOLHU efforts of other players. As mentioned in the beginning of this section, the Chinese government has demonstrated a strong commitment in this DUHD7KH:RUOG%DQN¶VDVVLVWDQFH to local energy management companies had helped establish an entire energy industry in the country. ³7KH &+8(( SURJUDP UHO\LQJ PDLQO\ RQ FRPPHUFLDO IXQGLQJ WKURXJK ,)&¶V guarantees, built on these efforts,´ 32 said the IEG report.

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The World Bank, 2010. &L#$%&!

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Box 10: C H U E E ± Industrial Bank IFC and Industrial bank signed the first CHUEE risk-sharing facility in May 2006. Under the program, IB provided lending to 50 energy-saving/emissions reduction projects with a total of RMB890 million ($141 milOLRQ LQILQDQFLQJ%\WKHHQGRIWKHIDFLOLW\¶VRXWVWDQGLQJORDQDPRXQWZDV50%PLOOLRQ million) as a result of repayment. The program has achieved visible economic and environmental effects, according to TANG Bin, director of Board Secretariat of IB. Industrial Bank established a dedicated department for energy efficiency lending in 2008 and developed special procedures and guidelines for processing such loans. In February 2008, CHUEE II was signed. The scope of financing expanded to include energy efficiency, renewable energy, and the China Clean Development Mechanism (CDM). IB provided loans to 71 projects under CHUEE II, for a total of RMB3.08 billion ($489 million) in financing. As of the end of 2011, outstanding loans were RMB1.14 billion ($181 million). There had not been any claims against the risksharing as of the end of June 2012, which indicates outstanding loan quality. IB signed up for CHUEE III (CHUEE-SME) in November 2011, which targets SMEs in non-coastal areas. LI -LDQQLQJPDQDJHURIWKH&RUSRUDWH%XVLQHVV'HSDUWPHQWRI,%¶V)X]KRX%UDQFKWROGWKHUHVHDUFKWHDP WKDW,%¶VJUHHQFUHGLWSURJUDPLVDOVRH[SHFWHGWRKHOSWKHEDQNDFFXPXODWH JRRGSRWHQWLDOFOLHQWVIRUWKH future. The branch has an outstanding green credit loan balance of RMB1.6 billion ($254 million), with 20 FOLHQWV³6RPHRIWKRVHFOLHQWVSDUWLFXODUO\VPDOOHURQHVZRXOGQRWKDYHEHHQDEOHWRJHWORDQVLIQRWIRUWKH SURJUDP´ VDLG /L $ERXW 50% PLOOLRQ  PLOOLRQ  RI WKRVH ORDQV ZDV LQFRUSRUDWHG in the CHUEE risk-sharing facility with IFC.

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Box 11: F ujian Sanxinlong Co. L td. ± A C H U E E C lient of Industrial Bank The research team visited Fujian Sanxinlong Co. Ltd., a client of Industrial Bank under the CHUEE program located in Fuzhou, the capital city of Fujian Province. This is a company with 160 employees that designs and manufactures manhole covers. The company was able to get a three-year, RMB3.8 million (U603,000) energy efficiency loan from the Fuzhou Branch of Industrial Bank in 2010 for a RMB6 million ($952,000) investment in equipment upgrades that would result in energy savings and emissions reductions. With the help of the loan, the company was able to go ahead with the project, which yielded cost savings of RMB100,000 ($15,870) per month, or RMB1.2 million ($190,000) a year. ³,WZRXOGKDYHEHHQYHU\GLIILFXOW IRUXVWRJHWDSURMHFWILQDQFLQJORDQRIWKLVVL]HDQGQDWXUHHOVHZKHUH´ said CHEN Shouqing, manager of the Finance Department of the company. ³:LWKRXWWKHKHOSRI,QGXVWULDO%DQNZHZRXOGKDYHH[SHULHQFHG ERWKDGHOD\LQLPSOHPHQWLQJWKLVSURMHFWDQGWLJKWIXQGLQJ´

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CHUEE loans have an immediate impact on GHG reduction because the upgrades are made quickly and this is reflected in the rapid repayment of the loans, which also reflects the cost savings the borrowers enjoy. The training in credit risk assessment of energy efficiency loans also led one partner bank to revise its overall risk assessment process because the cash-flow analysis that is part of CHUEE risk assessment is such a powerful tool in assessing all credit risk. (4) Summary of I F C Interventions IFC began to work with Chinese joint-stock banks and city commercial banks in the second half of the 1990s, providing tools for new management teams to lay the groundwork for true commercial banking. These tools covered management practices, risk underwriting, corporate governance, and business development. When the regulators were ready for the first experimental investments in Chinese banks, IFC took a significant but well-evaluated risk by putting equity into Chinese banks, entering a sector that other financial institutions were not yet ready to test. The combination of capital, technical assistance, and taking a strong role on bank boards established a relationship of trust with sponsors and managers eager to learn and ZLOOLQJWRFKDQJH,)&¶VFORVHFROlaboration with regulators also provided a model for bankUHJXODWRU LQWHUDFWLRQ $V PRUH FRPPHUFLDO EDQNV HPXODWHG ,)& SUDFWLFHV ,)&¶V ,QYHVWPHQW Operations moved into frontier areas, promoting energy efficiency finance, as well as rural and microfinance lending. Central WRDOORI,)&¶VLQYHVWPHQWVLQFRPPHUFLDOEDQNVKDVEHHQ demonstrating the commercial value of SME lending. C . O utcomes and A reas Identified for Improvement Overall, IFC-invested banks have achieved impressive business performance. Data the research team collected shows considerable expansion in assets, reduction in NPLs, and improvement in profitability. See Figure 4-1 below for comparisons of assets and NPLs for five of the banks where historic data was available. In 2007, of the 120 Chinese city commercial banks, three made initial public offerings (IPOs), and two of them were IFC clients: Bank of Nanjing and Bank of Beijing. By 2010, Bank of Beijing was among the top three banks of the fifteen listed Chinese banks (of all types including the Big Four) in terms of capital adequacy, asset quality, and profitability ratios. (Equity bases increased substantially with the IPOs that contributed to lower return on equity [ROE] after 2007 compared with that of 2005 when IFC first invested, as shown in Figure 41.) Among city commercial banks, the top competitor to Bank of Beijing in terms of size at that time was Bank of Shanghai; the closest competitors in terms of focus on SMEs were Bank of Nanjing and Industrial Bank, all three being IFC-invested banks.33 ³7KH VXFFHVVIXO ,32 RI Bank of Nanjing ZDV LQVHSDUDEOH IURP WKH FRQWULEXWLRQ DQG LPSDFW RI  ,)&´ said Zhang, Bank of Nanjing. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 33

Bank of Beijing Investment Project 23943 Expanded Project Supervision Report, 2010. &&#$%&!

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F igure 4-1: Business Performance of I F C-Invested Banks

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